c




 


‡ Evaluate Dell¶s tangible and intangible resources? Which are more
important as a source of competitive advantage? Why?
‡ What are the main capabilities of Dell? Does Dell have a core
competence?
‡ Does Dell have a sustainable competitive advantage in the Chinese
computer industry?
‡ evaluate the opportunities and threats in the general environment in
China?
‡ Use Porter¶s Five Forces Model to analyze the PC industry in China.
Given this analysis, is the industry attractive or unattractive?
‡ Who are the main competitors of Dell and how does Dell
measure up against these competitors?
‡ What is Dell¶s business-level strategy? Is the strategy
appropriate to offset the forces in the industry? Do you
recommend any changes?
‡ What was Dell¶s entry strategy in China and what
international-level strategy is currently being followed?
What were the main incentives for the entry into China,
and how would you evaluate the international strategy so
far?
 c



 



‡ Dell Computer¶s expansion into China, initially

via export in 1995
‡ subsequently in 1998 through establishment of a
local manufacturing and distribution operation
‡ decision to change its strategy from one focused
on the low-end consumer segment to the high-
end corporate segment
 Dell Inc.

‡ Price pressure from Chinese competitors

such as Legend, Founder, and Tongfang.
‡ price and profit margin declines in the
industry.
‡ Dell¶s inability to provide delivery of
computers and service and support in a
timely manner.
 Dell Inc.

‡ exited the low-end market and decided to

focus on the servers, printers, and data
storage gear.
‡ raised its prices and focused mostly on the
corporate market.
‡ strategy change has resulted in market share
increases. Dell captured 24.1% market share
in server shipments in 2004, and its PCs
captured 7.3% (third place).
 Dell Inc.

‡ Legend (which later changed its name to

Lenovo) and Founder ranked ahead of
Dell with market shares of 25.7% and
11.3% respectively.
‡ The case concludes with speculation that
Dell may re-enter the low-end market as
other firms drop out.
 Tangible Resources

‡ Financial Resources: (strong)

Dell is ranked first in worldwide PC market
share (20.7%).(Exhibit 1)
sales have climbed steadily from 1997 to
2004. (Exhibit 2)
revenue in the Chinese computer market
reached $8 billion in 2002, almost double
the 2002 revenue.
 Tangible Resources

‡ Dell¶s China sales increased to about 60%

of its total Asia-Pacific sales in 2003, from
45% in 2002, making China its fourth
largest market behind the U.S., U.K., and
Japan.
‡ Dell¶s net income has also increased from
1997 to 2004, although not at the rate of
its sales.
 Tangible Resources

Organizational Resources:
‡ Dell¶s direct sales system. Customers
could place orders via the Internet, but
only 5% of its orders were made in this
way.
‡ maintained toll-free numbers to provide
sales and support, and its sales personnel
visited cities to enlist new customers.
 Tangible Resources

‡ alliance between Dell and Oracle in China

to offer Linux based Oracle software on its
computers.
 Tangible Resources

Physical Resources: Strong

‡ Dell¶s local production plant in China. This
plant allowed Dell to continue its build-to-
order system which had made it so
successful in the United States.
‡ The build-to-order system allowed Dell to
keep its inventory levels at six days of supply
compared to 40 days for Chinese competitor
Legend.
 Tangible Resources

Technological Resources: Strong.

‡ Dell has traditionally had strong
technological resources and it seems to
have leveraged these in China through its
production plant and sales and service
organization.
‡ The alliance with Oracle also contributes
to its technological strengths.
 Tangible Resources

‡ Dell received the 2003 ³Best Overseas PC

Corporation´ award from China Center of
Information Industry Development for its
product performance.
 Intangible Resources

Human Resources:
‡ There is no discussion in the case of the
human resources aspects of the operation
in China in terms of the quality of human
resources available to the company, or the
extent to which Dell was dependent on
expatriates.
 Intangible Resources

‡ Innovation Resources: There is no

specific discussion in the case about
innovation activity, except the alliance with
Oracle that could possibly lead to
innovations. Dell has generally had a
reputation as an innovative company in its
technology, business practices (e.g., build-
to-own) and customer service.
 Intangible Resources

‡ Reputational Resources: Excellent. This

conclusion is based on prior knowledge
about Dell. The company is able to
leverage this worldwide reputation by
positioning itself in the higher priced end of
the market.
 Resource Audit

‡ Overall Assessment: Dell had strong

resources. The case presents more
documentation of its strengths in tangible than
intangible resources for the China operation, but
the company is generally known to have strong
intangible resources. A key concern that comes
out of the above analysis is whether Dell will
have the appropriate quality of China resources
to be able to carry out its strategy.
 Capabilities

‡ Capabilities are defined as ³the firm¶s

capacity to deploy resources that have been
purposely integrated to achieve a desired
state´ or ³the glue binding an organization
together«´ Also capabilities are defined as
residing in the ³unique skills and knowledge
of employees, and often their functional
expertise.´
 Capabilities«

‡ Possible capabilities at Dell are in its

manufacturing (build-to-order), and
resultant low inventory. Dell also has
competences in. its customer service.
 Core competencies

‡ Core competencies are defined as

³resources and capabilities that serve as a
source of a firm¶s competitive advantage
over rivals.´ Thus, core competencies are
groupings of resources and capabilities.
Not all of a firm¶s resources and
capabilities are core competencies.
 Core competencies«

‡ Dell¶s core competencies reside in its

manufacturing, technology, and customer
service areas.
 Core competencies & VC

‡ which activities contribute most to the core

competencies at Dell?
Inbound Logistics (inventory control),
Operations (build-to-own), Marketing and
Sales, Service (on line and phone order
capability, installation, and repair), and
Technology Development (product design,
servicing procedures).
 c
c

 

 




 

 



 


 

‡ Four Criteria for Sustainable Competitive

Advantage are:
(1) Valuable Capabilities (help the firm neutralize
threats or exploit opportunities) (Dell-' 
(2) Rare (not possessed by others):
(Dell-Mixed)
build-to-own and customer service capabilities of
Dell
  

 




 

(3) Costly to Imitate (Dell- Yes) It would be
costly to imitate the unique attributes of
Dell.
(4) Non substitutable (no strategic
equivalents)
(Dell- Yes)
  

 




 

‡ Dell¶s direct sales model as an example of a
non substitutable capability on the grounds
that to date, no competitor has been able
imitate it. Thus, to the extent that Dell is able
to replicate this direct sales model in China,
this capability is non substitutable. The case
does note, however, that Legend is
attempting to copy that direct sales model.
 Overall assessment

‡ Overall assessment: Mixed.

‡ compare the outcome of the above
analysis to the Dell¶s recent financial
performance.
 Strengths

‡ Strengths
‡ Reputation
‡ Competitive advantage (valuable, costly to
imitate, non substitutable)
‡ Manufacturing plant (build-to-order capability,
JIT)
 Strengths

‡ Direct sales model (on line and phone

order capability)
‡ Strong sales revenue in 2003 ($8 billion)
‡ Strategic alliance with Oracle
‡ Product performance (Best Overseas PC
Corporation Award)
 Weaknesses

‡ Weaknesses
‡ Dell does not have a low-cost advantage
that will allow it to compete in the
consumer segment.
‡ Possible cost advantages not realized
from the China plant.
 Opportunities

‡ Opportunities
‡ Large population in China and economic
growth potential (China is Dell¶s fourth
largest market)
‡ Sales potential in larger cities
‡ Growth potential in China (PC market
expected to grow by 19%)
 Opportunities

‡ Only 2.5% of urban Chinese own computers

‡ Reduction in tariffs on information technology
products (less costly to export to China)
‡ Attractive (high profit potential) industry
‡ Chinese government ministries and agencies
(as buyers of Dell products)
‡ Expansion into Japan, Korea, and Taiwan
 Threats

‡ Threats
‡ Low GDP per capita in China
‡ Weak government protection of intellectual
property
‡ Moderately high threat of entry of new
competitors
‡ Intense rivalry among competitors
(especially local Chinese competitors
‡ Legend¶s copying of Dell¶s direct sales
model in China
‡ Legend¶s attempt to boost brand
recognition via supply agreement at 2006
Turin Winter Olympics
‡ Legend ± IBM joint venture
 Demographic Segment

Demographic Segment
‡ O O


  opportunity23% of the
world total).
‡ age structure
‡  O 


 large cities)
‡ ethnic mix
‡   


 higher income)
Source: Country Commercial Guide (CCG)
(http://www.buyusainfo.net/docs/x_3265405.pdf).
 Economic Segment

Economic Segment
‡ China¶s economy has increased by 9.8 % in
2005, and total retail sales increased 13 % in
2005.
‡ China¶s PC market was estimated to grow by about
19% in 2004-2005.
‡ U.S. exports to China increased 28%, 22%, and
19% respectively for the years 2003, 2004, and
2005.
 Economic Segment

‡ per capita income in China is low (US$ 1,583)

and income distribution is uneven with urban
centers such as Beijing with per capita incomes
in the range of US$ 5,000.
‡ The Chinese middle class (estimated at 200
million people) has a per capita income of over
US$ 8,000.
‡ Dell¶s PCs were priced at $ 483 (the highest
among competitors)& had been selling poorly.
 Political/Legal

Political/Legal
‡ China¶s legal and regulatory system is not
transparent and can be inconsistent and
arbitrary.
‡ Business relationships are sometimes based on
relationships (guanxi).
‡ government protection of intellectual property
has been weak.
 Political/Legal

‡ China¶s political system still operates in part as a

planned economy and maintains control over
unions, and banks and other financial
institutions.
 Sociocultural Segment

Sociocultural Segment
‡ The Chinese attitudes and culture are becoming
more similar in purchasing patterns and work
ethic to U.S. attitudes and culture.
‡ There are some cultural differences in
purchasing expectations (e.g., needing to try
products before buying) that companies will
have to accommodate.
‡
 Global Segment
‡ Annexure 2 shows that the U.S. is the most
important market for Dell (69% of sales),
followed by Europe (21%) and then Asia/Pacific
(10%).
‡ The Chinese market presents sales
opportunities for Dell, but also threats from local
competitors.
 ý 

  

‡ presents other opportunities for Dell as it expands into

the north Asia region (Japan, Korea, and Taiwan) using
China as a production base.
ý 

  

‡ Most of the opportunities in the general environment
come from the tremendous economic growth, while most
of the threats come from the political/legal environment.
‡ The political/legal threats are likely to lessen as China
fulfils more of its WTO obligations, and reforms its
regulatory system.
 Threat of Entry

Threat of Entry: Moderately High.

‡ The threat of entry from both foreign as well as local
competitors appears to be moderately high given the
recent entry by U.S. competitors.
‡ IBM, Compaq, and HP entered the industry in the early
1990s, and Dell entered in 1995.
‡ Since these entrants were all established firms in the
United States (and other countries), they did not face the
barriers of product differentiation, capital requirements,
or switching costs.
 Threat of Entry
‡ although access to distribution channels and government
policy (permit requirements) may have been barriers.
‡ Scale economies will be a barrier to new entrants given
the scale advantages that Dell now has through its large
production plant in China.
‡ There is also a threat of entry from local competitors,
although these will face product differentiation (given the
brand recognition of the current competitors).
‡ Since China joined the WTO in 2002, there will be
reduced government policy barriers.
 Bargaining Power of
Suppliers
Bargaining Power of Suppliers: Low.
‡ Dell is vertically integrated, and thus does
face powerful suppliers.
‡ If we assume that most competitors are
vertically integrated, then supplier power is
not threat.
‡
 Bargaining Power of Buyers

Bargaining Power of Buyers: Moderate

‡ state-owned companies, MNCs, and educational
institutions accounted for most of the PC sales in China.
‡ main buyers were government, education, telecoms, and
power and finance. These accounted for 50% of its
business.
‡ it is possible that these groups have at least two
characteristics of powerful buyers (purchasing a large
portion of the industry¶s total output, sales account for a
significant portion of the seller¶s annual revenues), these
buyers could be powerful.
 Bargaining Power of Buyers

‡ since individual buyers have no negotiating

power, they are not powerful.
‡ One aspect of the PC industry that mitigates
the power of buyers is the reputation and
uniqueness of a particular PC brand (such as
Dell, HP, and IBM).
‡ Dell has recently been making sales to China¶s
government agencies and ministries which had
formerly bought computers from Legend.
 Threat of Substitute
Products
Threat of Substitute Products: Weak.

‡ There are no substitutes.

 Rivalry

Rivalry: Intense
‡ The intensity of the rivalry is seen primarily in the price
pressure that is brought to bear by the local competitors.
‡ high fixed costs of the production capacity, and the high
strategic stakes.
‡ Legend started to follow Dell¶s direct sales model in
China.
‡ entered into an agreement to supply computer
technology to the 2006 Turin Winter Olympics in an effort
to boost its brand recognition.
 Rivalry

‡ Legend also planned a joint venture with IBM

in China to further increase its market share.
‡ only 2.5% of urban Chinese owned a
computer compared to 55% in the United
States.
‡ Exhibit 5 shows the top six PC rivals in China
in 2003, with Dell ranked 4th with 7% market
share.
 

  



  

‡ Despite the intense rivalry, and the moderate threat of
entry, the industry remains attractive (i.e., it has a high
profit potential) primarily because of the potential for
growth.
‡ China was the 5th largest PC market in 1999 behind the
USA, Japan, Germany, and the UK.
‡ In addition, the main buyers are institutions which have
more resources to make purchases rather than individual
purchasers who are constrained by low disposable
incomes.
 Competitor Analysis

‡ Competitor Analysis includes understanding

competitors¶ j


,  


,
 
, and 

and  .
‡ The j


 of the competitors seem to
be to build market share rapidly given that only
2.5% of urban Chinese own a computer.
‡ Since IBM, Compaq, and HP have recently lost
market share to local competitors (Legend,
Founder, and Tongfang), these American
competitors will likely try to regain the lost share.
  


 

‡ How to overcome Legend¶s attempts to

copy its direct sales approach and build it
brand recognition.
‡ How to build a cost advantage so that it
can reenter the low-cost segment (as CEO
Rollins appears to be suggesting that the
company will do).
 



 

‡ differentiation based on its product quality, build-to-own
capability, and direct sales method. Dell is able to
leverage its unique competencies in China by offering a
superior product at a higher price than its competitors.
‡ Dell does have an element of focus in its scope, that is, it
sells mostly to the Large Corporate Accounts which
accounted for 50% of Dell¶s business.
‡ More recently, Dell had begun sales to Chinese
government agencies and ministries.
 þ

 






‡ Dell¶s initial entry strategy was exporting

It did not allow Dell to implement its
build-to-order strategy, which had been
so successful in the United States.
distribution was not under Dell¶s
control.
 þ

 





‡ wholly-owned subsidiary that was
responsible for both manufacturing and
distribution.
(1) low cost Chinese labor
(2) to control its own distribution.
(3) allow adjustments for local conditions,
e.g. allowing potential customers to try
the product before purchasing it.
 Additional Information
‡ Dell plans to build a new plant in Xiamen, China. It will
produce PCs for Dell customers in northern Asia.
‡ 14.9 million PCs were sold in China in 2004. Dell has the
largest market share of any foreign PC maker in China.
‡ Dell has opened a Enterprise Command Center (ECC) in
Xiamen, China (September 2004). The ECC will provide
business customers with better integration of service
delivery. By monitoring weather and traffic patterns, Dell
problem solvers can make parts and service delivery more
efficient. In the U.S., ECC has resulted in nearly 25%
improvement in resolving customer issues.
 Where to Get More
Information
‡ www.dell.com
‡ http://www.infoworld.com/article/05/03/25/HNdellchina_1.html
‡ http://www.infoworld.com/article/05/03/25/HNdellchina_1.html
‡ http://www.infoworld.com/article/05/03/25/HNdellchina_1.html
‡ http://www1.us.dell.chttp://ww6.infoworld.com/products/print_f
riendly.jsp?link=/article/05/10/25/HNdellchinaheadresigns_1.h
tml
‡ om/content/topics/global.aspx/corp/pressoffice/en/2004/2004_
09_08_rr_000?c=us&cs=555&l=en&s=biz